The Bear's Lair: Weasel Economics - I

By MARTIN HUTCHINSON, UPI Business and Economics Editor   |   Feb. 10, 2003 at 7:12 PM

WASHINGTON, Feb. 10 (UPI) -- The "Axis of Weasels" of France, Germany and now Belgium, satirically attributed to Donald Rumsfeld by the Web site "Scrappleface," is an idea whose time may have come. It refocuses one's perception, and provides an explanation for the alarming non-disappearance of socialism, supposedly dead since the fall of the Berlin Wall in 1989, but in reality very much alive. In economics as in foreign policy, the Axis of Weasels has its own agenda, which it seeks to impose on the rest of us.

Traditionally, or at least since the 1960s, France and Germany -- let's, for fun, go on calling them the Axis countries -- have been held to be liberal capitalist countries, very much like the United States, albeit with somewhat higher public spending and a stronger social safety net.

Certainly German Chancellor Konrad Adenauer (1949-63) and his finance minister and successor Ludwig Erhard (1963-66) were strong believers in the free market, whose policies marked a sharp departure both from Germany's pre-war statist traditions and from the mushy socialism that had been advocated by the British and to a lesser extent the U.S. occupation forces of 1945-49. After Erhard's currency stabilization of 1948, the 1950s were the great decade of German economic growth, at almost Asian rates, and of German entrepreneurship -- many of the problems of the "mittelstand" of medium-sized companies today stem from the passing away of the postwar generation that founded them.

In France, too, Charles de Gaulle (1958-69)'s Fifth Republic meddled incessantly in the economy, but also reduced taxes and allowed the modernization of the French economy, and its economic growth transition to take place. Both countries had among the highest levels of public spending of the period -- 34 percent of gross domestic product in Germany and 36 percent in France in 1963, according to Organization for Economic Cooperation and Development statistics -- but as the United States proved during the 1980s and 1990s, public spending at that level is not incompatible with a free economy.

It must be remembered that in the 1960s, while public spending worldwide was considerably lower than it is today, the world economy was a long way from the liberal capitalism beloved of the globalizers. World trade had peaked as a percentage of gross world product in 1913, and in the 1960s was running far below its level of 50 years earlier. In Britain, for example, telecoms, electricity and coal were in the public sector, as was the largest British oil company (British Petroleum), while the steel industry was re-nationalized in 1965. Even in the United States, transportation (air, rail and trucking) were controlled by the Interstate Commerce Commission, oil and gas prices were also controlled and interest rates were subject to the ceilings of Regulation Q. Internationally, tariffs were considerably higher than today, exports of many goods to the Soviet bloc were prohibited, and most countries had active programs of import substitution, combined with quantitative restrictions on imports.

Thus, in 1965, the Axis were among the world's more liberal, free market countries.

This changed after the retirement of Adenauer and de Gaulle. In Germany, 1969 saw the election of a Social Democrat government led by Willy Brandt. The Social Democrats had officially abandoned Marxism in 1959, but there is no question that Brandt was to the left of the party and represented growth in government. In France, Georges Pompidou (president, 1969-73) continued de Gaulle's policies, but after his death, Valery Giscard d'Estaing (president 1974-81) although elected on a free market platform, proved a believer both in government expansion and in the closest of relations with Germany's Social Democrat regime.

The proof of this is in public spending, by central and local governments, as a share of GDP. Germany's, 36 percent of GDP in 1966, the year Erhard retired, increased rapidly to 45 percent of GDP by 1975, where it stabilized during the Social Democrat years to 1982. France's public spending, which had declined somewhat to 35 percent of GDP in Pompidou's last year of 1973, shot up by no less than 11 percent under Giscard to 46 percent of GDP in 1981.

Naturally, these increases in public spending's share of the overall pie made the Axis high tax countries, and drastically reduced the stellar rates of economic growth that both countries had previously enjoyed. Nevertheless, other countries also suffered substantial increases in the size of government during those years, so a rebound into economic vitality was by no means impossible -- as of course happened in the United States and Britain under Ronald Reagan (1980-88) and Margaret Thatcher (1979-90).

In the Axis, there was no such rebound. In France, the free market alternative in the 1981 election was the youthful Jacques Chirac, since Giscard had shown his true colors as a public spender. He got 15 percent in the first round, coming third to Giscard's 23 percent and Socialist Francois Mitterrand's 21 percent. In the second round, therefore, the French electorate had no free market alternative, and so chose the full blooded socialism of Mitterrand over the half-baked socialism of Giscard. Big mistake. As banker Guy de Rothschild famously said, after Mitterrand had nationalized his bank, "To be a Jew under (wartime Vichy President Henri-Philippe) Petain was bad enough, but to be a banker under Mitterrand, c'est insupportable." Instead of declining as might have been expected, French public spending continued to rise, to a peak of 52 percent of GDP in Mitterrand's last year of 1994.

Germany missed a good chance to elect a free market chancellor in 1980, with the doomed campaign of the CSU's Franz Josef Strauss. When Germany finally ejected the moderate SPD Chancellor Helmut Schmidt in 1982, it replaced him with Helmut Kohl, from the left of the CDU-CSU coalition. Public spending declined with returning prosperity in the 1980s, down to a nadir of 41 percent of GDP in 1989, but then rose sharply with German reunification, reaching a peak of 47 percent in 1995. Nevertheless, with even Germany's 1995 level of public spending being only 2 percent higher in terms of GDP than that of 1975, the German economy should have had room to grow. So, too, should the French economy, after the election of Jacques Chirac in 1995, and late '90s prosperity brought at least a modest decline in the level of public spending.

The problem in both countries since the middle 1990s has been not so much public spending itself as an appalling level of economic restriction, which has hobbled their economies' attempts to grow. In France, the socialist Lionel Jospin government in 1996 introduced the 35-hour workweek, greatly increasing the already elevated costs of employing a French workforce. In Germany, absurdly high social costs and state taxes, and a "wishful thinking" 1990 setting of the East German mark at 1 to 1 against the Deutschemark, which produced huge East German unemployment were combined with an highly restrictive attitude to regulation, so that for example until the middle 1990s shops were forbidden to open after noon on Saturdays.

In Germany in particular, even when economic growth seemed to appear, it proved to be a chimera. The East German property bubble of the middle 1990s, and the Neuer Markt dot-com bubble of the late 1990s were both artificial, both produced by a badly managed and largely state subsidized banking system, and both ended in disaster, with huge losses for the banks.

Part II of this survey Tuesday will discuss the methods used by the Axis to advance their economic agenda.

(The Bear's Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that, in the long '90s boom, the proportion of "sell" recommendations put out by Wall Street houses declined from 9 percent of all research reports to 1 percent and has only modestly rebounded since. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

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